Late payments and losses on small-ticket equipment that Ascentium Capital leases to physician offices, gas stations, hotels and restaurants have started rising, and credit rating agencies are taking notice.
Moody’s Investors Service expects that the leases backing Ascentium’s next securitization will experience higher cumulative net losses of 2.75%, or 25 basis points more than those backing a deal completed in April. The rating agency the weakening credit performance of Ascentiium’s managed portfolio, which refers to all of the firm's outstanding leases, whether securitized or held on balance sheet.
Ascentium, which is based in Houston and backed by Warburg Pincus, did not have to increase investor protections for the $235 million of notes to be issued in the new deal, Ascentium Equipment Receivables 2017-2, however. The senior, triple-A rated notes benefit from the same level of credit enhancement, 21.75%, as the April transaction.
However, Moody’s noted in its presale report that actual losses Ascentium’s past deals have been masked, because the company has “substituted” some delinquent contracts in past deals with current contracts.
The rating agency does not factor this into its loss estimates, since the practice is voluntary – transaction documents do not require the lessor to keep substituting delinquent collateral. If anything, the practice indicates that the credit performance of the underlying collateral of Ascentium’s previous deals is weakening, Moody’s said.
Kroll expects cumulative net losses to be lower, in the range of 2.35%-2.45%, in its base-case scenario.
Kroll’s presale report points to a potential source of the recent delinquencies, however. It notes that Ascentium recently settled with a “substantial number” of healthcare professionals who ceased making payments due to alleged deficiencies in the services provided. Under the terms of the settlement, which was reached in September but is awaiting court approval, Ascentium has agreed to accept a discounted payment amount from the plaintiffs.
None of the contracts subject to the dispute are included in the collateral for the 2017-2 deal. However, this category represents the largest obligor industry, at 18% of the collateral pool. The next three largest industry concentrations are general freight Trucking (10%), hotels (excluding casino hotels), and motels (6%), per Moody's.
Both rating agencies cited the diversity of industry’s as a credit positive. They note that the securitized pool is also granular with respect to obligor concentration, with top borrower and top 10 borrower concentrations of 0.4% and 2.7% of the pool balance, respectively – though that is slightly higher than the sponsor’s prior two deals.
The inclusion of a prefunding account, which gives Ascentium 60 days after the deal closes to acquire $31.9 million of the collateral, as a potential negative, since it could introduce a drift in the overall credit quality of the pool.
Three senior tranches of Class A notes will be issued in the transaction: a money market tranche and two term tranches maturing in May 2020 and December 2021.
There are also three subordinate tranches: Class B notes maturing in April 2022 are rated Aa2 by Moody's and AA+ by Kroll and have 15.8% CE; Class C notes maturing in August 2022 are rated A2/A+ and have 11.35% CE; and Class D notes maturing in October 2025 are rated Baa3/BBB+ and have 7.5% CE.
J.P. Morgan Securities is the lead underwriter.
Ascentium’s deal hit the market one day after another equipment lessor, Dell, launched a much larger transaction.
The $999.62 million Dell Equipment 2017-2 is secured by various networking, computer, server and other miscellaneous office technology products. Servers and storage products represent the majority of the pool at 34%, which is consistent with Dell’s prior transaction completed in April.
One thing the two deals do have in common is a diverse group of obligors. The largest obligor, top 10 obligors and top 20 obligors represent 3.5%, 19.8% and 30.0% of the transaction’s collateral. Fitch Ratings noted in a presale report that these levels are the lowest for any Dell transactions to date. “While there are high concentrations within the top 15 obligors, the concentrations decline significantly after the top 15 and are more consistent with traditional small-ticket equipment ABS transactions,” the report states.
Fitch expects cumulative net losses to be 1.55%, in its base-case scenario.
Three senior tranches of notes will be issued: $250 million of money market notes and two AAA rated term tranches, $395.4 million maturing in February 2020 and $236.01 maturing in October 2022. All benefit from 16% credit enhancement
There are also three subordinate tranches, an AA rated tranche maturing in October 2022, an A rated tranche maturing in October 2022, and BBB rated tranche maturing in October 2023.
Wells Fargo Securities and Barclays Capital are the lead managers.